ABB India: Many a slip between the cup and the lip
ABB India Ltd’s June quarter results have led to an uneasy realization among analysts who track the company. That dawning realization is a rather simple one: strong order inflows may not immediately boost the financial performance.
Tracking the 54% rise in order inflows in 2016, analysts were pencilling in strong financial performance this year. But performance so far this year has remained sub-par. Revenue in the first half of the year is up only 7%. Operating profitability (Ebitda margins), which was expected to improve on better utilization, has softened instead, weighing on earnings growth. Revenue in the June quarter grew 6%, while operating margins softened 60 basis points. One basis point is one-hundredth of a percentage point.
With performance trailing estimates, several analysts have now pared their revenues and earnings expectations for the current year as well as the next.
Rohit Natarajan, analyst-institutional equities, IDBI Capital Markets and Securities Ltd, sums up the mood pithily in the results review note: “With an all-time high order backlog of Rs120 billion (Rs12,094 crore), the revenue recognition should have been stronger. That was not the case. Agreed, half of orders are medium-to-long cycle. Yet, even by the most conservative standards, a 6% growth is doubtless sub-par.”
Analysts are also piqued by the weak transmission of gross margins. As IDBI Capital points out, gross margins remained strong. But that did not translate fully into profitability. “Doubtless ABB has surprised with strong base-order inflows of Rs23 billion (Rs2,301 crore). However, with the indecisive trend in operating margins, we pared our CY17/CY18 EPS by 10%/3%,” IDBI Capital adds. EPS is earnings per share. Perhaps the Street got carried away by successive quarters of strong order inflows.
T.K. Sridhar, chief financial officer at ABB India Ltd, says multiple factors determine profitability. It is currently being influenced by limited market opportunities and competitive prices. As market conditions improve, he expects profitability to rise. Also, the order wins include two large orders which have their own gestation period. These projects are expected to reflect in ABB India’s revenues from the fourth quarter or the end of this year which should lift growth, Sridhar says.
ABB India follows a January-December financial year. So, April-June is the financial second quarter for the company.
Even so, given that a large part of the order book is composed of base orders which have relatively shorter execution cycles, one cannot fault the Street for high expectations.
Also, the expensive valuations—the stock trades at more than 40 times one year forward earnings estimates—call for superior performance.
Of course, its MNC (multinational company) pedigree is helping the stock trade with superior valuations. Also, for all its slip-ups on revenue growth, ABB India is still in a good position.
In spite of subdued investment trends in the domestic economy, the company is seeing healthy order inflows, and commands an enviable order book, thanks to its wide product portfolio and exposure to new technologies. While that should comfort investors, the niggling worry is the revenue and profitability trajectory.